Question: In the Enron case, the company eventually

> How does one go from whistleblower to being charged by the SEC for participating in a scheme from mid-2000 to mid-2002 to overstate online revenue through round-trip transactions over two years while being the CFO of the America Online (AOL) Division of

> Sue Kolb has been associated with Valley View Hospital in Highlands Ranch, a small town in Colorado. Kolb is a CPA licensed in Colorado and handles the hospital’s financial affairs; she climbed the ladder to CFO after 10 years in the accounting departmen

> Do you think it would be ethical for a CPA to have someone else do for her that which she is prohibited from doing by the AICPA Code of Professional Conduct? Why or why not? Do you think a CPA can justify allowing the unethical behavior of a supervisor b

> Another ethical dilemma deals with a runaway trolley heading for five railway workers who will be killed if it proceeds on its present course. The only way to save these people is to hit a switch that will turn the trolley onto a side track, where it wil

> Yardley, Inc., is a mid-size company in Oklahoma City. It has been struggling the past few years because chemical products it uses in its agricultural production process increasingly have been deemed environmentally unsafe. Yardley’s primary reliance on

> You are a tax manager and work for CPA firm that that performs audits, advisory services, and tax planning for wealthy clients in a large Midwestern city. You just joined the tax department after five years as a tax auditor for the county government. Dur

> Joe Kang is an owner and audit partner for Han, Kang & Lee, LLC. As the audit on Frost Systems was reaching its concluding stages on January 31, 2016, Kang met with Kate Boller, the CFO, to discuss the inventory measurement of one its highly valued produ

> One area of concern for the accounting profession for the past 20 years has been the proliferation of alternative practice structures. Potential problems exist because the audit side of the business may be influenced by the public entity that controls it

> Family Games, Inc., is a publicly owned company with annual sales of $50 million from a variety of wholesome electronic games that are designed for use by the entire family. However, during the past two years, the company reported a net loss due to cost-

> Lance Popperson woke up in a sweat, with an anxiety attack coming on. Popperson popped two anti-anxiety pills, laid down to try and sleep for the third time that night, and thought once again about his dilemma. Popperson is an associate with the accounti

> The audit of KBC Solutions by Carlson and Smith, CPAs, was scheduled to end on February 28, 2016. However, Rick Carlson was uncertain whether it could happen. As the review partner, he had just completed going over the work paper files of the senior audi

> How does the nature of the internal audit function, strength of ethical leadership, and level of moral intensity influence whether an auditor will record questionable and undocumented journal entries?

> Describe the role of professional judgment in ethical leadership as it pertains to accountants and auditors.

> How might moral intensity influence the decisions made by accounting professionals?

> Why is it important for a CPA to promote professional services in an ethical manner? Do you believe it would be ethical for a CPA to advertise professional services using testimonials and endorsements? Why or why not?

> Are accountants and auditors moral agents of corporations and society? Explain.

> Values-driven leadership as envisioned in the Giving Voice to Values technique poses the following question: Once I know what is right, how do I get it done and get it done effectively? Discuss how an authentic leader would go about addressing this quest

> Identify three reasons why there may be ethical leadership failures and explain why failed leadership occurs.

> Distinguish between authentic leadership, transformational leadership, and servant leadership. Are all necessary to change individuals and social systems within an organization?

> The American writer, Robert McKee, is quoted as saying, “True character is revealed in the choices a human being makes under pressure.” Explain what you think this means in the context of moral intensity and ethical leadership of organizations.

> Why might a moral person who is not viewed as a moral manager fail to establish an ethical culture in an organization?

> Moral legitimacy refers to the generalized perception or assumption of observers that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, and beliefs. Explain how moral legitimacy might

> Bruns and Merchant found that managers did not agree on the types of earnings management activities that are acceptable. Refer to the definitions of earnings management in Chapter 7. Explain how leadership traits influence how managers might perceive the

> What is the role of leadership in auditor assessments of the likelihood of fraud in the context of the fraud triangle?

> Explain how the circumstances under each of the following might reflect failed leadership by auditors and the audit firm: • Under-reporting of time on an engagement • Premature sign-off on audit procedures • Accepting weak client explanations for account

> Using the concept of justice, evaluate how an auditor would assess the equality of interests in the financial reporting process.

> Audit firms are expected to establish and maintain a system of quality control. PCAOB inspections often cite the lack of quality controls as a deficiency of audit firms. What role does leadership play in developing the kind of quality control system that

> Why do you think studies show that no single factor has a bigger impact on the ethicality of a firm’s culture than the personal examples set by firm leaders?

> How does organizational dissonance influence ethical leadership and decision making?

> Evaluate the moral intensity of the issues faced by Diem-Thi Le in her whistleblowing experience at DCAA.

> How does an auditor’s commitment to the firm, the profession, and to colleagues influence whether she will blow the whistle on financial wrongdoing?

> How might an accounting firm influence whether non–tax practitioners view a contentious issue with a client as having been handled ethically?

> Choose someone from the business or accounting world who you think is an authentic leader and explain why you believe that to be true.

> Comment on the statement that what a company’s income statement reveals is interesting but what it conceals is vital.

> In 2010 LinkedIn reported trade payable obligations totaling $10.8 million in other accrued expenses within accrued liabilities instead of accounts payable. In 2011, note 2 in the 10-K financial statements described the use of accrued liabilities instead

> Needles talks about the use of a continuum ranging from questionable or highly conservative to fraud to assess the amount to be recorded from for an estimated expense. Discuss his concept of a continuum and the choices within a range from an ethical pers

> Distinguish between ethical rights and obligations from the perspective of accountants and auditors.

> Comment on the statement that materiality is in the eye of the beholder. How does this statement relate to the discussion in the chapter of how to gauge materiality in assessing financial statement restatements? Is materiality inconsistent with the notio

> Evaluate the following statements from an ethical perspective: “Earnings management in a narrow sense is the behavior of management to play with the discretionary accrual component to determine high or low earnings.” “Earnings are potentially managed, be

> Evaluate earnings management from a utilitarian perspective. Can earnings management be an ethical practice? Discuss why or why not.

> Relevance and faithful representation are the qualitative characteristics of useful information under SFAC 8. Evaluate these characteristics from an ethical perspective. That is, how does ethical reasoning enter into making determinations about the relev

> Evaluate the following statement: Do the ends of positive organizational consequences justify the means of earnings management?

> In well-governed companies, a sense of accountability and ethical leadership create a culture that places organizational ethics above all else. What role does organizational culture play in preventing financial shenanigans from being used to manage earni

> Big Pharma has been criticized for making deals that may bring harm to shareholder interests. Evaluate the following transaction from earnings management and ethical perspectives: A pharmaceutical drug company agreed to make payments to wholesalers if th

> Explain the meaning of the following two statements and why each may be true: a. Where management does not try to manipulate earnings, there is a positive effect on earnings quality. b. The absence of earnings management does not, however, guarantee high

> The auditor of Beastie Company is reviewing the following client information for the prior year ended December 31, 2015, and all four quarters of 2016. Estimated Accruals in pretax earnings (in millions)   December 12/31/15  Quarter ended 3/31/16 

> In the study of earnings quality by Dichev et al., CFOs stated that “current earnings are considered to be high quality if they serve as a good guide to the long-run profits of the firm.” Discuss how and why current earnings may not be a good barometer o

> How should an accounting professional go about determining whether a proposed action is in the public interest?

> Are the use of non-GAAP financial measures ethical?

> Critics of IFRS argue that the more principles-based standards are not as precise as, and therefore easier to manipulate than, the more rules-based GAAP. The reason for this is that IFRS requires more professional judgment from both auditors and corporat

> Do you agree with each of the following statements? Explain. • EBITDA makes companies with asset-heavy balance sheets look healthier than they may actually be. • EBITDA portrays a company’s debt service ability— but only some types of debt. • EBITDA isn’

> The SEC’s new rules on posting financial information on social media sites such as Twitter means that companies can now tweet their earnings in 140 characters or less. What are the problems that may arise in using a social media platform to report key fi

> Explain how a company might use the accounting rules for impairment of long-lived assets to manage earnings.

> Tinseltown Construction just received a $2 billion contract to construct a modern football stadium in the City of Industry, located in southern California, for a new National Football League (NFL) team called the Los Angeles Devils of Industry. The compa

> Revenue recognition in the Xerox case called for determining the stand-alone selling price for each of the deliverables and using it to separate out the revenue amounts. Why do you think it is important to separate out the selling prices of each element

> Safety-Kleen issued a major financial restatement in 2001. The next year, the company restated (reduced) previously reported net income by $534 million for the period 1997–1999. PwC withdrew its financial statement audit reports for those years. Do you b

> Krispy Kreme was involved in an accounting fraud where the company reported false quarterly and annual earnings and falsely claimed that, as a result of those earnings, it had achieved what had become a prime benchmark of its historical performance, that

> According to the 2011 National Business Ethics Survey conducted by the Ethics Resource Center, Generational Differences in Workplace Ethics, a relatively high percentage of Millennials consider certain behaviors in the workplace ethical when compared wit

> Maines and Wahlen state in their research paper on the reliability of accounting information: “Accrual estimates require judgment and discretion, which some firms under certain incentive conditions will exploit to report non-neutral accruals estimates wi

> In Arthur Levitt’s speech that was referred to in the opening quote he also said: “…I fear that we are witnessing an erosion in the quality of earnings, and therefore, the quality of financial reporting. Managing may be giving way to manipulation; Integr

> Valley View Manufacturing Inc., sought a $500,000 loan from First National Bank. First National insisted that audited financial statements be submitted before it would extend credit. Valley View agreed to do so and an audit was performed by an independen

> What are the legal requirements for a third party to sue an auditor under Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934? How do these requirements relate to the Hochfelder decision?

> Assume a third party such as a successor audit firm quickly discovers a fraud that the predecessor auditor has overlooked for years. Do you think this provides evidence supporting scienter? Explain.

> Explain the legal basis for a cause of action against an auditor. What are the defenses available to the auditor to rebut such charges? How does adherence to the ethical standards of the accounting profession relate to these defenses?

> Do you think that the provision of nonaudit services for a client with a failed audit is evidence of negligence?

> Distinguish between the legal concepts of actually foreseen third-party users and reasonably foreseeable third-party users. How does each concept establish a basis for an auditor’s legal liability to third parties?

> In this chapter, we discuss problems encountered by the PCAOB in gaining access to inspect workpapers of auditors in U.S. international accounting firms that have Chinese company clients that list their stock in the United States. Explain why these probl

> What are the unique challenges to the global internal audit function?

> According to Adam Smith’s The Wealth of Nations, when it comes to government oversight in the free market and regulations, the less intervention, the better. Does the government play an important role in encouraging businesses to behave in an ethical man

> In discussing the benefits of the Global Code of Ethics, Richard George, chairperson of the International Ethics Standards Board for Accountants, said, “Strong and clear independence standards are vital to investor trust in financial reporting. The incre

> What is the purpose of having a two-tier system of boards of directors in countries such as Germany? How does the dual-board approach ameliorate the potential conflicts in the principal-agent relationship between investor and manager?

> One provision of the U.K. Bribery Act is that it applies to bribes that occur anywhere in the world by non-U.K. companies that conduct any part of their business in the United Kingdom. For example, the Bribery Act would cover a company that has a few emp

> Consider the practice of making “facilitating payments” to foreign officials and others as part of doing business abroad in the context of the following statement: International companies are confronted with a variety of decisions that create ethical dil

> Distinguish between common-law liability and statutory liability for auditors. What is the basis for the difference in liability?

> The Institute of Chartered Accountants in England and Wales (ICAEW) has adopted a code of ethics based on the IFAC Code. In commenting on the principles-based approach used in these codes, the ICAEW states that a principles approach “focuses on the spiri

> What are the costs and benefits of establishing one set of accounting standards (i.e., IFRS) around the world? How do cultural factors, legal systems, and ethics influence your answer? Apply a utilitarian approach in making the analysis.

> How do Gray’s accounting values establish a basis for financial reporting in countries with different cultural systems?

> Business ethics is about managing ethics in an organizational context and involves applying principles and standards that guide behavior in business conduct. According to IFAC, “The decisions and behaviors of accountants should reinforce good governance

> Consider the following statement and explain the relationship between legal compliance on a global level and ethical responsibilities of accountants and auditors: “Ethical values and legal principles are usually closely related, but ethical obligations t

> In a 2014 segment of Shark Tank, Trevor Hiltbrand, the founder of nootropic supplement maker Cerebral Success, sought funding from the "Sharks" to introduce a line of nootropic shots to be sold on college campuses in Five Hour Energy-style containers, bu

> Has the accounting profession created a situation in which the auditors’ ethical behavior is impaired by their professional obligations? How does the profession’s view of such obligations relate to how courts tend to view the legal liability of auditors?

> Assume a U.S. company operates overseas and is approached by foreign government officials with a request to provide family members with student internships with the company. The company does business in that country with foreign customers and is negotiat

> Some auditors claim that increased exposure under Section 404 of the SOX creates a litigation environment that is unfairly risky for auditors. Do you think that the inability of auditors to detect a financial statement misstatement due gross deficiencies

> The following pertains to auditor legal liability standards under the PSLRA: a. The Reform Act requires that, in any private securities fraud action in which the plaintiff is alleging a misleading statement or omission on the part of the defendant, “the

> Nixon and Co., CPAs, issued an unmodified opinion on the 2015 financial statements of Madison Corp. These financial statements were included in Madison’s annual report and Form 10-K filed with the SEC. Nixon did not detect material misstatements in the f

> As discussed in the opening reflection, MF Global filed a complaint charging PwC with professional malpractice, breach of contract, and unjust enrichment in connection with its advice concerning, and approval of, the company’s off-balance-sheet accountin

> Rationalization for fraud can fall under two categories: “no harm” and “no responsibility.” Assume an employee is directed by management to reduce recorded expenses at year-end by insignificant amounts individually, but which are material in total. How m

> The following statement expresses the conclusion of XYZ auditors with respect to the company’s investment in ABC. Assume that all amounts are material. What kind of audit opinion should be rendered given this statement? Explain the reasoning behind your

> Give one example each of when an auditor might render an unmodified opinion and include an emphasis-of-matter paragraph and other-matter paragraph. What is the value of such paragraphs in the audit report?

> Explain the content of each section of the audit report. Evaluate the importance of each section with respect to the users of financial reports.

> Do you think it is ethical for an employer to use social media information as a factor when considering whether to hire an employee? What about monitoring social networking activities of employees while on the job? Be sure to use ethical reasoning in ans

> All companies are vulnerable to fraud, but small businesses are particularly vulnerable. Why do you think this may be the case? What signs of possible fraud may be more pronounced in small businesses when compared to larger ones?

> What is the ethical value of applying the fraud triangle to assess the risk of material misstatements in the financial statements?

> AU-C 240 points to three conditions that enable fraud to occur. Briefly describe each condition. How does one’s propensity to act ethically as described by Rest’s model of morality influence each of the three elements of the Fraud Triangle?

> Dennis just got hired after not working for two years following his reporting of financial statement fraud by his previous employer. Dennis was treated as an outcast and ultimately fired after the company “trumped up” some unsubstantiated claims of poor

> Audit morality includes moral sensitivity, moral judgment, moral motivation, and moral character. Explain how audit morality plays a key role in determining best audit practices that influence audit performance.

> Do you agree that a professional accountant providing professional services to a client that is not an audit client of the firm or a network firm, who is unable to escalate a matter pertaining to an illegal act within the client, should be required to di

> The International Auditing and Assurance Standards Board has issued a new standard effective December 15, 2016, requiring that engagement partners physically sign the audit report with their names instead of the name of the firms, as is done in the Unite

> In its report prepared for audit committees and other stakeholders in December 2014, “Our Commitment to Audit Quality,” EY acknowledges that recent PCAOB findings indicate the need for improving audits of internal control over financial reporting (ICFR),

> Discuss the cultural factors that create barriers for the Chinese units of Big Four firms to receiving support from the Chinese authorities to share audit information with the PCAOB to aid its inspection process.